It’s a complicated world out there, and the investment options available to IRA owners vary greatly among financial institutions. Some IRA providers allow customers to open brokerage accounts that provide access to a vast array of different types of investments and asset classes. Others may offer only a limited investment menu of, say, 20 mutual funds or ETFs. So how do you decide what’s right for you?
What’s the Best Way to Invest?
If there were a definitive answer to that question, you’d hardly need a book or broker to help you. Unfortunately, investing is both an art and a science. Following these general principles will help you set up a strong investing foundation and give you the best chance of success.
In the words of any grandmother who’s ever roamed the earth, “Don’t put all your eggs in one basket.” It’s as true in investing as it is in egg gathering. It’s well established by past experience that investors who spread their money across a range of investments do better than those who concentrate it in one company, industry or asset class (such as stocks, bonds, or real estate). It’s important to research an IRA provider’s investment selection before opening an account to ensure it meets your investment goals.
Common IRA investment options include:
• Mutual funds
• Exchange-traded funds (ETFs)
• Money-Market Funds
• Certificates of Deposit
The easiest way to achieve diversification is to invest in a mutual fund or an exchange-traded fund (ETF). ETFs trade throughout the day like individual company stock, but they are pooled funds that invest across a range of companies and assets. Mutual funds are also pooled investments, but they trade once daily, at the end of the trading day. Some ETFs and mutual funds, such as those that track the S&P 500 index, are broadly diversified; others are concentrated in a particular industry, like technology, or a particular asset, like gold or real estate.
You may also want access to international mutual funds, such as emerging market funds, or specific types of bonds, so it’s important to make sure that your provider offers them. It can’t be said too often: Do your research.
Buy Low, Sell High
Few investing concepts are easier to understand and harder to follow. Emotions are the poison of good investing. Protect yourself from your own worst impulses by devising an investing plan that follows strict guidelines. That can mean buying or selling a stock based on certain thresholds (buy when it drops 10 percent, sell when it increases 25 percent) or after a certain period of time.
It helps to understand your own tolerance for risk before making an investment. If you’re the anxious type, investing in a stock that’s likely to be volatile (such as a technology startup), increases the likelihood that you’ll panic and sell too soon, particularly if the stock drops drastically.
Also, take care to avoid “hot” stocks. In general, companies that are “diseased” but “curable” offer better prospects for high returns than those that are held in favor by everyone with a few dollars to invest. Think Apple at the beginning of 2000 ($26 a share) rather than Apple at the start of 2012 ($456).
Look Into a Target or Age-Based Fund
For those of us who really like to set it and forget it, many mutual fund companies offer funds that change their allocation based on your current age and, therefore, years to retirement age. Over time the funds typically decrease holding of stocks in favor of less volatile investments such as bonds, inflation-protected securities and the least volatile of them all—cash.
Don’t Forget About Fees
When researching an IRA provider’s investment options, make sure to check out its fees—including any trading fees it charges and the investment fees. Mutual funds, for instance, sometimes charge a front- or back-end sales “load” that’s tacked on when buying or selling shares of the funds. The ongoing fees and expenses charged by funds can also vary widely, and some IRA providers offer funds with lower fees than others.
Self-Directed IRAs Are for the Pros
Some IRA providers also offer account owners access to non-traditional investment options, such as real estate, private equity or franchises. These “self-directed” IRAs allow account owners to make investment decisions on behalf of the retirement plan. Some IRA providers specialize in offering self-directed IRAs, which carry many IRS rules about the types of investments that can be made and how those investments must be managed. But beware: Self-directed IRAs are complicated and best left to investing pros.